Life Insurance: Money When It’s Needed Most

By Steve Davis, CFP®

Life Insurance: Money When It's Needed Most

In 1990, when my wife was pregnant with our first child, I lost my job in a huge layoff at the bank where I worked. All the banks at the time were struggling and nobody was hiring. The only job I could find was selling life insurance. One of my former coworkers purchased one of the first policies I ever sold; I think he felt sorry for me.

Two years later, this same friend of mine died unexpectedly while playing basketball in his adult pick-up league. It was a shock to lose a friend at such a young age, but the experience of delivering a substantial death benefit check to his widow helped me truly believe in what I do. You see, this insurance money allowed a mom to leave her 9-5 job so she could stay at home when her young kids needed her most. Recently, these same children graduated from college without student loans. Their education will forever be a lasting legacy to their dad, thanks in part to the proceeds from that life insurance policy purchased so long ago.

Three Ways to Cut Costs on Your Life Insurance
The job market over the past few years has been even worse than when I lost my job in the early 1990s. Paying insurance premiums during times like this can be challenging, but this is often the time when it’s most important to own your own life insurance. During the recent round of layoffs, many people who had coverage only through work lost their only insurance when they lost their jobs. According to a recent study by the financial research firm LIMRA, life insurance ownership is at a 50-year low with less than 45 percent of US families having individual coverage.

Life insurance is sometimes used to fund estate taxes or business obligations, but we won’t be focusing on that in this article (that’s a subject for another day). The majority of time it’s purchased to take care of your family once you’re gone. Here are three ways to make life insurance more affordable.

1. Figure out how much coverage you really need.

Remember that life insurance has one purpose: to meet your financial responsibilities if you die. If no one depends on you financially, you likely don’t need it and shouldn’t pay for it. Life insurance is not an investment. Instead, it’s used to take care of your family once you’re gone. Insurance death benefits provide income to replace the salary you used to earn and can also be used to pay one-time expenses like your funeral or your children’s college education costs.

Sometimes, people own more coverage than they actually need. For example, you may not want to pay off your mortgage if you have an especially low interest rate or you need the mortgage interest tax deduction on your tax returns. There are some basic rules-of-thumb for determining how much coverage you need, but these are sometimes way off base. A better way is to figure out your specific needs by using an online calculator like this one: http://www.talkwithdavis.com/Life-Insurance.c123.htm

2. Shop for lower rates.

Rates have come down dramatically since I sold my first policy in 1990. You can evaluate rates online or with the help of an advisor. Working with an unbiased insurance advisor, preferably one who represents a large number of life insurance companies is often the best way to review your term insurance. While online vendors give you the ability to compare quotes, an advisor can often help you navigate the underwriting process. This is especially important if you have any medical issues that might disqualify you from low “preferred” rates – and not all companies have the same underwriting requirements. Additionally, a company that offers the best “preferred” rates may not be cost competitive when comparing “standard” rates.

3. Cut costs with term insurance.

Life insurance comes in two basic flavors: term and permanent. Term policies usually have a lower fixed cost and provide coverage for a specified period of time, often a term of 10 – 30 years (such as until your children graduate college). Permanent insurance, like whole life is designed to build equity (cash value) and will last your entire life as long as you continue to pay premiums. In the early years, the annual cost for permanent insurance tends to be substantially more than the premiums for term insurance. Some people prefer the idea of buying permanent insurance and building equity, but this is a huge mistake if it means you end up with a lot less coverage than you need. For the same cost, term insurance provides significantly more death benefit for your beneficiaries. Term insurance is usually the only type that most families need.


The Reason for Life Insurance
My friend really didn't buy his insurance because he felt sorry for me. He did it because he loved his family. Almost twenty years after his death, his children continue to benefit from their dad’s decision so long ago.

The cost and availability of life insurance depend on factors such as age, health, and family medical history.  If replacing your insurance, never cancel a policy before your new coverage is in place.  Policies commonly have surrender charges and replacement may carry income tax implications. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.  If you are considering the purchase of life insurance, consult a professional to explore your options.

This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/articles/life-insurance-money-when-its-needed-most

Honey, I lost my 401k (and other big mistakes)

By Steve Davis, CFP®

It has been a long winter in New England, but we’ve just moved the clocks ahead and soon spring will be here. The storms are over, the snow has melted and now it’s time to clean up the yard. I recently found a winter hat that had gone missing after the first snow storm of the year. It was in my backyard for months, but we couldn’t find it because the grass has been covered with a blanket of snow since Christmas. The old adage, “out of sight, out of mind” certainly held true because after a week or so I sort of forgot about that hat and resorted to wearing another one we had in the closet.

Lost Accounts:

It is amazing how many people have misplaced 401k accounts. You might think it inconceivable that someone would “lose” the information about an investment worth thousands of dollars, but it is not all that uncommon. For frequent job changers, trying to keep up with the paperwork on several different orphan 401k accounts can be an administrative nightmare. Losing track sometimes happens after a move when the mail forwarding order expires, or after a name change following marriage or divorce.

At other times, the account information is lost when a former employer declares bankruptcy or when the owner of a small company dies and the company closes its doors. Trustees have a fiduciary liability to distribute the plan’s assets, but sometimes this doesn’t occur, especially when the trustee is a former employee who is no longer being paid. The good news is that retirement funds invested in 401k plans belong to the employee, not the employer, so even when a company files bankruptcy or ceases operations, plan participants are protected. Because assets continue to be invested, amounts that can be reclaimed are sometimes substantial. If you think you or a family member may have money in an abandoned plan, search the Department of Labor’s database. http://www.askebsa.dol.gov/AbandonedPlanSearch/

Beneficiary Blunders:

The 401k Beneficiary Form kept in the Human Resource Department of your old company is often more important than the will or trust that was carefully crafted by your attorney. That’s because a will or trust has virtually no effect on how your retirement account assets are distributed to your heirs. Instead, 401k (and IRA) accounts are transferred according to the provisions listed on your beneficiary form. And all too often these forms are hastily filled out during company enrollment meetings and are never given a second thought. Here are four of the biggest Beneficiary blunders:

Mistake #1: You, your heirs or your old employer can’t find the form. In a recent ruling, the US Supreme Court made it clear that without a proper beneficiary form you are stuck with the default provisions of your company’s plan. Don’t take it on faith that the form you filled out a dozen years ago is still filed correctly at your old company. If the form is lost, it doesn’t matter if your will, divorce decree or other legal documents provide different instructions. When the default provisions say your account should be paid to your estate, that’s what will happen even if this action results in thousands of dollars in extra taxes or probate costs.

Mistake #2: The form is filled out incorrectly or is out-0f-date. Sometimes what seems like a simple oversight can accidently disinherit those you want to favor. A million dollar mistake occurred in 2001 after Anne Friedman died of a heart attack and her entire pension of almost $1 million went to her estranged sister rather than her loving husband of twenty years. This travesty happened because the beneficiary form on file was completed years before Ann and her husband met in 1978. The form had been forgotten by all except the sister who refused to give up her new found wealth. Similar tragedies can occur when adult children die before their parents. In cases like this, 401k proceeds usually skip the family of the deceased beneficiary and are instead shared only by the surviving children.

Mistake #3: Listing a minor as beneficiary. When a minor child inherits a 401k directly, a court-appointed legal guardian must be named to administer the funds on the child’s behalf. If this happens, your family will get tied up in the court system with all the cost and aggravation that involves – and with outsiders making decisions that impact your family’s welfare.

Mistake #4: Not naming a contingent beneficiary. If your primary beneficiary isn’t around to collect your 401k, and you haven’t named a secondary beneficiary, the Probate Court will likely liquidate your account in a lump sum and force the immediate payment of substantial federal and state taxes. This simple oversight robs your children and grandchildren of the opportunity to stretch your distributions –and the tax bite—over their lifetimes. Stretching the distributions like this allows the investments to continue to grow tax deferred and may result in substantially greater inheritances.

A Spring Cleaning Reminder:

Don’t make the same mistake I made when my hat was forgotten once out of sight. Instead, when you grab your rake and begin to clean your yard this spring, remember that you may have some old 401k plans that need tidying up too. If you have old 401k accounts, consider rolling that money over to your own consolidated IRA.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/articles/honey-i-lost-my-401k-and-other-big-mistakes-2